January 31, 2007

Doing Business

It's been a while since I've carped about some arcane (but sinister!) thing the World Bank or IMF has been doing. So let's do that. Every year since the fall of 2003, the World Bank has put out a ranking of 175 countries around the world, based on the "ease of doing business" within their borders. The "Doing Business" report has become quite influential since its inception—both the Bank and the IMF often refer to the rankings when they make policy recommendations to developing countries—and it's worth a closer look.

In 2005, to take one example, a World Bank assessment worried that Ecuador ranked much too low in the Doing Business rankings, partly because of its poor "flexibility of firing" grade—apparently, it's too difficult to fire people at will in Ecuador. So the Bank suggested that the country "consider measures aimed at reducing rigidities in the labor market, particularly with regard to firing restrictions, mandatory profit sharing, and employer-subsidized retirement." These "reforms" were pushed even though only 14 percent of Ecuadorian firms saw labor-market regulations as a major problem. And Ecuador's hardly alone. The International Confederation of Free Trade Unions (ICFTU) has compiled a long list of countries with similar experiences.

So what's the deal with these rankings? Let's look at the most recent report: "Doing Business 2007: How to Reform." The countries listed are ranked in ten categories related to taxation, licensing, financial regulation, legal institutions, and—the contentious one—labor. In the "Employing Workers" category, countries get a higher ranking if they have a low minimum wage, if they don't restrict the number of hours an employee can work, and if they allow companies to fire employees at will, among other things.

Countries with poor or non-existent labor standards seem to do particularly well, it seems. Saudi Arabia, for instance, doesn't allow workers to organize—a violation of the International Labor Organization's (ILO) fundamental principles—and yet it receives a very high score in the "Employing Workers" category. The Marshall Islands and Palau both notched nearly perfect scores—even though neither country has much in the way of health and safety standards (Palau doesn't even ban child labor). If a country wants to boost its rankings in this category, apparently all it needs to do is go consult with the Heritage Foundation and hack away all its labor standards.

Now, it's certainly possible that labor deregulation is always for the best, and brings only good things, as the Doing Business report implies. But how would we know? The report doesn't provide any sort of cost-benefit analysis of these regulations. There's no mention of the potential downsides to overly-long working hours or a skimpy minimum wage. No one points out that many countries don't offer unemployment benefits, so severance pay requirements and advance dismissal notices—two things frowned upon by Doing Business—are often the only available substitute. No one notes that discrimination still remains a major problem in many countries, and junking certain firing protections could have real consequences.

Interestingly enough, not everyone at the World Bank even believes that labor deregulation is always and everywhere an unqualified good. After all, the Bank's 2006 World Development Report sensibly notes that labor markets don't work like commodity markets do, and can often have "unfair and inefficient outcomes when the bargaining position of the workers is weak." And yes, the WDR report warns against too-rigid work rules, but still argues that some labor regulations "can improve market outcomes and lead to significant equity gains." But the Doing Business report appears to be more influential than the WDR, and doesn't share this sort of nuance. Instead, it always pushes deregulation, without hesitation. From all accounts, it seems to be having an effect.